To The Moon

While hopes for a less aggressive Federal Reserve helped US stocks overcome last week’s flurry of disappointing earnings from tech giants, JPMorgan Chase &. Co.’s trading desk now sees room for a massive rally should policy makers turn dovish when they announce their decision on Wednesday.

The S&P 500 could surge at least 10% in one day if the central bank raises interest rates by a slower-than-expected half of a percentage point, and Chair Jerome Powell signals willingness at the press conference to tolerate elevated inflation and a tightening labor market, according to the bank’s sales team including Andrew Tyler. The scenario is the “least likely” to materialize, yet the “most bullish” outcome for equity investors, the team wrote in a note to clients on Monday.

Laying out every possible scenario on Fed day, the JPMorgan team is embarking on a high-stakes task of predicting market moves based on an event that has largely been positive for stocks this year. Of the six prior meetings, the S&P 500 rose four times on Fed day and fell on the other two, according to Bloomberg data.

To be sure, the bank’s economists expect the Fed to boost rates by another three-quarters of a percentage point, in line with the median forecast in a Bloomberg survey, and Tyler’s team views other scenarios as less likely. Still, the exercise offers a lens into the risks that investors are grappling with.

“These outcomes are skewed to the upside as our view is that last week the market had every reason to retest lows given the disappointment from megacap tech earnings and still moved higher,” noted Tyler and his colleagues. “Several client conversations have focused on trying to identify who is the incremental seller; we think the risk/reward is to the upside.”

-50 basis point hike, with a dovish press conference: “It is difficult to conceive of a scenario where this outcome occurs given inflation levels and a tight labor market,” the team wrote. “Should this outcome occur, the immediate reaction could produce a double-digit one-day return for equities.” S&P 500 up 10% to 12%

-50 basis point hike and a hawkish press conference: An outcome that could stem from a Fed that is increasingly concerned about financial stabilities as it balances growth and inflation. S&P 500 up 4% to 5%

-75 basis point hike and a dovish press conference: A scenario viewed as having the second-highest probability of playing out. “If you saw the Fed give explicit guidance for the December meeting, then that is likely viewed as a dovish outcome.” S&P 500 up 2.5% to 3%

-75 basis point hike and a hawkish press conference: “This is the most likely outcome with Powell retaining optionality for December and 2023 meetings while emphasizing the current risks to inflation moving higher.” The team also views this as the outcome most expected by bond markets, so says there may not be a significant move in yields that keeps equities from melting down. S&P 500 down 1% to up 0.5%

-100 basis point hike and a dovish press conference: While this is seen as unlikely as a 50 basis point hike, it may mean the Fed both wants a higher terminal rate and wants to complete the tightening cycle this year. “Separately, the market may digest this move as the Fed having prior knowledge of where next week’s CPI prints.” S&P 500 down 4% to 5%

-100 basis point hike and a hawkish press conference: Considered the best outcome for equity bears waiting for this latest rally to dissipate. “Here this would seem to be a Fed reassessing its own inflation forecasts, which some investors feel is too optimistic.” S&P falls 6% to 8%, likely resting year-to-date lows

By Lu Wang

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